Governments are making headway in dismantling preferential tax regimes across the world.
In a recent OECD progress report looking at peer reviews of over 160 preferential tax regimes in over 100 jurisdictions found that of 99 preferential tax regimes that required action to conform to current OECD guidelines, the required changes have already been made or initiated in 93 cases.
Preferential tax regimes generally cover tax incentives that apply to geographically mobile income such as financial and services income and income from intellectual property, and are the focus of Action 5 of the OECD's Base Erosion and Profit Shifting (BEPS) Plan. In 2015, the OECD issued the BEPS Action 5 Report containing minimum guidelines applicable to these regimes, including a substantial activity or nexus approach to align taxation with genuine business substance and prevent base erosion and profit shifting. This report provides an update on how various regimes currently stack up against the OECD Action 5 standards.
The 2015 BEPS Action 5 Report contains a minimum standard focused on countering harmful tax practices. Generally, the OECD notes that using concessional taxation rules to attract investment to a particular country has, over time, led to the theory that the world was on a "race to the bottom" with corporate taxation. The OECD's report makes recommendations on how to effectively counter harmful tax practices and takes transparency into account. The report recommends compulsory spontaneous exchange on rulings related to preferential regimes and also suggests requirements for substantial activity before any preferential regime is granted.
For example, the OECD recommendations include a "nexus approach" that links benefits under preferential IP regimes to the taxpayer's qualifying R&D expenditures, which gave rise to the IP income. Under the nexus approach, the cost of acquiring IP should not be regarded as a qualifying expenditure. For a taxpayer to be able to support claims that qualifying income can be traced to qualifying expenditures, they will need to track expenditures, IP assets and income. After July 2016, new taxpayers will not be able to join an existing IP regime if it is not consistent with the nexus approach. However, jurisdictions may introduce grandfathering provisions that could allow taxpayers to benefit from the current regime until June 2021.
Substantial activity is also required for non-IP preferential regimes (e.g., financing or leasing regimes, banking and insurance regimes). The same principle is suggested to apply to those regimes, so that the taxpayers undertaking the core-income generating activities will be required to produce the type of business income covered by the preferential regime.
Of the 164 regimes reviewed in the last 12 months:
The report also includes
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Information is current to November 14, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500